Prepaid Expenses Meaning
Prepaid expenses are referred to as those expenses or expenditures that are not recorded in the company accounts as an expense, but the price for the same has been paid in advance.
In other words, it is a kind of future expense for which a company has paid in advance. As per the matching principle, the expenses must be matched with all the revenue that it assists in generating for the company.
That’s why initially, the prepaid expenses are recorded as an asset as they provide benefits in future. It is not considered as an expense until and unless it is consumed.
The prepaid expenses can be used over many accounting periods and considered as a current asset in the balance sheet. If any prepaid expense is not consumed within the accounting period, it is recorded as a long-term asset or non-current asset.
Prepaid Expenses Examples
Prepaid expenses will always exist due to the nature of certain goods and services. The most common examples of prepaid expenses are Insurance and Rent. Insurance is always purchased in order to protect against any unfortunate accident in future.
Prepaid Expenses accounting treatment
The following entry is passed for prepaid expenses
Prepaid Expenses Dr.
To Cash Cr.
This can be understood better with an example
A company signs one year lease for a warehouse on a rent of Rs.50000 per month, with an annual amount of Rs. 600,000 paid upfront.
The entry passed will be as follows:
Prepaid Rent Dr. 600000
To Cash Cr. 600000
Adjusting entry after the expenses is consumed can be as follows
Rent Expense Dr. 50000
To Prepaid Rent Cr. 50000
This concludes the topic of Prepaid Expenses, which is an important part of accounting for Commerce students. For more such interesting topics, stay tuned to BYJU’S.